Purchasing Management Essay
At present, the purchasing raw materials and semi-finished products make the most considerable part in the structure of a prime cost of the majority of the world companies. It means that the questions of supply chain management are constantly under a special attention of companies.
Effective purchases are a pledge of support of the demanded level of profitability, production quality and investments into business development. In order to increase supply effectiveness, a complex approach to Supply Relationships Management (SRM), which would allow connecting the strategy of supply with its realization and raised extent of the involvement of suppliers into the business of a company, is necessary. The given paper will discuss the strategic supplier relationship management process using the examples on the electronics, apparel, chemical and construction industries.
At such an interaction with the partners, interested in the development of business of all technological chain there is a confidence in an optimality of the purchasing processes and logistics of deliveries. Besides, business should be supported by a continuous monitoring of market, search of new opportunities of reduction of expenses. Strategic relationship with suppliers has to be based on knowledge of benefit of each of partners, understanding of general plans and visions. Besides, business should be supported by a continuous monitoring of the market, search for new opportunities of reduction of expenses. A strategic relationship with suppliers should be based on the knowledge of benefit of each of partners, understanding of general plans and visions.
The reliability of the supplier is an important component of success and stability of the company. There are four main points, necessary to take into consideration:
- The purchasing product;
- The purchasing place;
- The purchasing conditions;
- The methods of future purchases.
In order to create a qualitative product it is required not only to choose and assess the supplier, but also management of suppliers. Strategic supplier relationship management includes the creation of a portfolio of suppliers and its management. The development of the system of a company’s supply is a difficult process including constant analysis of the purchasing activity of a company, analysis of an overall performance of suppliers, support of the processes of negotiations with potential suppliers, management of contracts, tools of a choice of the optimum supplier for the satisfaction of a company’s requirements in materials or services. Moreover, the focus of the strategic supply management is put towards the establishment of a long-term mutually beneficial relations with partners. Except the analysis of price conditions in the offers of suppliers, the emphasis is placed on the search for the best terms of delivery, which will give a stable economy at a high level of quality and service in the future. This management component helps purchasers and analysts to estimate the requirements in goods and services, to control the market of purchases and to reveal new sources of deliveries in a full compliance with the strategic objectives of a company and its partners. Alleijn (2013) states that “supplier Relationship Management depends on collaboration amongst the enterprise’s internal and external suppliers for survival and progress. Collaboration across sourcing strategies, management and governance remains critical to the success of supplier relationship management”.
During the era of electronic business, the opportunities for collaboration of a supplier and a buyer become more available. Phones and fax machines were two most widespread instruments of communication of a purchaser and a supplier. Obtaining orders, discussion of projects, and an exchange of the schedule of deliveries and planning of sale – all this became by means of a simple telephone line. Offering scalable and functionally reliable scenarios of interaction by means of the Internet, Supply Relationship Management (SRM) allows the companies to provide to suppliers the necessary protected information on plans of purchases and orders. The involvement of suppliers allows business partners to participate in the internal processes of the company connected with supply, using the ordinary Web browser. The process of purchases can be considerably simplified by means of self-service of suppliers functioning through the Internet portal playing a role of a key link in all business operations in business. Besides, there is an opportunity for providing to suppliers access to internal control systems of orders for their electronic processing, management of accounts and updating of delivery terms or specifications.
Speaking of the comparison of the application of strategic supplier relationship management in electronics, apparel, chemical and construction industries, it is necessary to say that it is different in different industries and has its specific features. For example, one of the leaders of the electronics industry – the Philips Company – has changed its activity from the purchasing one to supply. The top management of the company made a decision to involve suppliers into the process of product development. It helps to meet the requirements and expectations of customers. The official website of the Philips company (2014) states “where possible we design in standard solutions to better capture value and reduce the lifetime costs of our products. To do this effectively, we constantly review our supply base and build strong relationships with strategic suppliers”. At present, the electronics industry is characterized by innovations, demanding an effective interaction of the company’s managers with its suppliers. The top management of the company often changes the nature of the supply chain of Philips and the interactions with its suppliers.
The apparel industry is characterized by the organization of production, which should resist to the “aggressive” proposal of suppliers and the alternativeness of relationship increases. In view of toughening of the competition in the market the companies of apparel industry should pursue a competent supplying policy, focused on the reduction of a degree of the environmental risks, decrease in expenses and strategic partnership.
The improvement of the process of a supplier selection in the field of deliveries of material resources is considered as a factor of an increase of efficiency of resource provision of an economic entity. The effective management of limited, diverse resources providing their balance and economy will allow the production organizations to coordinate the process of completion of resources more accurately, to cut down expenses on their consumption, and, therefore, to reduce prime cost of the made production and to increase efficiency of production economic activity. The described procedure provides the system and complex work with suppliers, presented in the form of the following stages:
- Formulation of the strategy and tasks in relation to the market of supply and specific suppliers and ways of their achievement (action);
- The general analysis and studying of the market of producers and suppliers (including the market of raw materials);
- Segmentation of suppliers by standard positions;
- Choice of a supplier;
- Organization of interaction with suppliers;
- Assessment of efficiency of results of purchases;
- Management of the relations with the supplier
The development of SRM in the system of deliveries of the companies of the chemical industry is different from the SRM of the other industries. The majority of chemical industry companies support the initiative called “Together for Sustainability” (TfS). This initiative includes the assessment, audit of sustainable development in the international delivery system.
The TfS initiative is directed at the development and implementation of the international program for suppliers, which provides an assessment and improvement of steady methods of supply, including ecological and social aspects. The suppliers, taking part in the program, should fill in only one form instead of a set of questionnaires; the new form includes all necessary information on a sustainable development provided to all customers participating in the program who, otherwise, would need a separate assessment or a check of a sustainable development of these suppliers. The initiative is based on the accepted norms of conscientious practice and the established principles, such as the UN Global Contract (UNGC) and the World Charter “Responsible care”, and also on the standards developed by the International Labor Organization (ILO), the International organization for standardization (ISO), the International organization for social responsibility (SAI) and others. The TfS initiative includes an assessment and check of suppliers with the involvement of independent experts:
- Assessment includes evaluation in the sphere of management of deliveries with the use of the principles of a sustainable development, as a partner for work with cards of a sustainable development of suppliers. The results of an assessment and a rating of indicators of cards of a sustainable development are provided to all suppliers.
- The participants of the TfS initiative work with the independent auditor company for the purpose to measure the stability of the suppliers’ activity with the use of in advance defined criteria of audit developed taking into account the requirements of a chemical industry. Such criteria include management, environment, labor protection and health, work and human rights, the management sphere. Audit includes a check directly on object, for example, studying of capacities, warehouse and office buildings.
Benton & Mchenry (2010) state that the priorities of the construction industry concerning SRM considerably differ from, for example, electronics and chemical industries. Thus, the biggest construction organizations widely apply SRM for the competitive advantage of the company. The company’s top management uses the categorizing and ranking of potential suppliers and subcontractors. There are three main categories of suppliers in the construction industry. They include strategic, preferred and transactional.
The highest form of partnership of a company and its suppliers includes the form at which the chain of deliveries from three to four companies is the uniform system of logistics – vertical integration. The examples include an integration of a company-developer, the producer of electro-adjusting equipment, the producer of transformers, test laboratory and the engineering company. The other example is represented by a chain: producer of cable production – producer of electro-adjusting products – producer of lighting production.
For the definition of own strategy concerning suppliers it is necessary to execute some stages of work.
Stage 1. The analysis of the nomenclature of the purchasing production.
First of all, the analysis of the nomenclature of the purchasing materials and division of them on the following categories should be carried out
Non-critical for productions/sales – the materials, which can be easily replaced by analogs, and the absence of which will not cause the stop of production or loss of clients;
Main materials for productions/sales – the materials, including expendables for the equipment;
Problem materials – the materials from the main category. They are difficult in purchase, transportation, storage and processing (for example, perishable, dangerous, demanding special conditions of transportation and storage, etc.);
Strategic materials – the most significant highly profitable materials which will be the main in the future, and the main product, which is in the development at the moment, will be made of them.
Stage 2. Determination of a supplier role in the production process.
The role of a supplier depends on the category of materials. (Fig.1).
The requirements to an ordinary supplier include
- Convenience of work: a minimum time of delivery (from the moment of order up to arrival of goods), obligatory delivery by forces of a supplier in accordance with the coordinated schedule, a convenient complete set by repeated deliveries in a month registration by the uniform account and a package of documents, etc.;
- Standard quality and low prices;
- Expedient cooperation by the contractual obligations.
- In a crisis situation the non-critical materials become the first applicant for the decrease of expenses. It is necessary to analyze all nomenclature and define which goods can be refused and what can be replaced with cheaper analogs, the quality of which goods can be lowered.
- The main materials compose the most expensive part. The frequency of deliveries, in most cases, is regular. Any delay in the supply of materials or a low-quality can result in a production stop. Therefore, the following requirements to suppliers of the main materials are necessary:
- Reliable supply: a strict observance of the stipulated terms, packaging accuracy, reservation of materials in a supplier’s warehouse, delivery by the forces of a supplier;
- Stable production quality. Moreover, a supplier assumes the functions of a quality check of products and guarantees quality check;
- Obligatory payment delay. An ideal term of the existence of an investment resource is7 days (from the moment when the raw materials in the form of finished goods are shipped to the client and money is received for it up to the moment of accounts payable).
- In a crisis situation top management of a company should estimate all available resources: clients, suppliers, warehouse, goods, technologies, equipment, and personnel, etc. Moreover, the analysis of changes in the market and the forecast of the development of a situation in a market is necessary. It is necessary to define the uniqueness of a company and what can be used in the future. At absence of an investment resource in the company only the minimum of materials, which are extremely important for the survival and necessary to clients, should be left.
- After the analysis of all types of problems the suppliers of problem materials should correspond to the following requirements:
- Readiness to carry out the joint programs for the optimization of deliveries: to change the norms of shipment, quality of packing, frequency of deliveries, to care of the increase of safety of production, transportation, storage and processing;
- Joint focusing on cost formation, including ability and readiness of the supplier to take a part of processing on the production, and also to provide training of workers and operators in competent work with raw materials, to give technological consultation and support;
- Proximity of a supplier. The important factors for the remote suppliers include the existence of the channels of distribution or the regional warehouses close to a company’s production or granting of such a term of credit which will be paid, at least, at the time of processing of the purchased raw materials;
- Long-term contracts.
- A supplier, who showed earlier not only partner intentions, but also readiness for integration, should be chosen almost for all problem materials. This is the preferable supplier. Joint programs demand a lot of time and powers of both parties. The opportunistic relations and pressure upon the supplier will not result in success. In case of force majeure circumstances the market regularly should be looked through regarding the presence of the safety supplier for a single acquisition of a single volume.
- Strategic materials – those materials, the share of which in pricing is rather high now and in the future key highly profitable products; they have a certain share of expenses in joint costs, high participation in creation of profit. There are the following requirements to the strategic supplier:
- Readiness for the system integration and the coordinated company policy on the basis of the technology which is already available in a company;
- Optimum organization of own production owning to the existence of a good interaction with suppliers;
- Existence of sufficient means for the implementation of research and design works, aiming at innovations;
- Readiness to accept market risks on own responsibility.
- In crisis situations it is possible to define whether the strategy was competently chosen or not, and whether the choice of the supplier during the previous period was carefully carried out. It is necessary to build the system, allowing increasing business and becoming the base for the future growth.
Stage 4. Analysis of a portfolio of suppliers and assessment.
After the definition of the portraits of a good supplier depending on his role, the careful analysis of all available suppliers should be carried out for a choice of the main suppliers. It will help to optimize the whole portfolio. It should be noted that in each category of materials (noncritical, main, problem, strategic) there should be individual parameters of an assessment determined by different types of production which depend on the degree of importance of a product in a line of the purchased production and development of the supply market. Thus, the process of selection and assessment of a supplier includes the following stages:
- Determination of needs;
- Development of the requirements for a supplier;
- Composition of a list of suppliers;
- Analysis and assessment;
- Selection of a supplier;
- Definition of contract terms and its further negotiation;
- Determination of monitoring procedure and mechanisms.
Stage 5. Work with a supplier.
There are the further meetings with all suppliers from a short list. They are informed about the most important requirements and aspects of interaction. After that a special trial period should pass (around a month), during which the decision on volumes and terms of contracts is made. All suppliers are given feedback on job evaluation, and are informed about their rating among the other suppliers. At this stage, it is necessary to fulfil a serious work with major customers and suppliers, to define the common sales forecasts and purchases, opportunities and the present condition of the clients and suppliers market, to speak about the situation and a financial state. It is very important to do the criteria measurements and to watch dynamics.
Management of relationship with suppliers, focused on the achievement of the actual results in the field of an increase of profitability of purchases, promotes a decrease in a prime cost of the made production at the level of the company. The consolidation of the data about the requirements and branches of the company in purchases is the most important condition of the economy on volumes of purchases. The centralized control and the approval of demands do address control of an expenditure of the budget of purchases and optimum planning of insurance stocks possible.
At present, the search for suppliers takes a lot of time; therefore, the connection of this process with the current needs for a company’s purchases is lost. As a result, there are expensive mistakes at the conclusion of the contractual relations and overstocking of warehouses with the non-demanded goods. Integrating the processes of definition of requirements, search for suppliers and purchasing campaign, the companies take an advantage of the concluded agreements to the improvement of service, depreciation of deliveries and minimization of risks on deliveries.
Possessing the expanded analytical opportunities, the tools on the rational management, the instruments of electronic interaction with suppliers, the reasonable strategic supply management allows increasing the general quality of supply and reducing the risk of failure of deliveries without attraction of the additional budget.